Saturday, August 15, 2009

How Gov't. Turned American Dream Into Nightmare

Excerpts below from an excellent WSJ article "The New American Dream: Renting: It's Time to Accept that Home Ownership is Not a Realistic Goal for Many People and To Curtail the Enormous Government Programs Fueling This Ambition," by Thomas Sugrue, professor at the University of Pennsylvania. Excellent analysis of how government policy turned the American Dream into the American Nightmare for many homeowners, because of public policy that encouraged excessive home ownership and in the process turned good renters into bad homeowners. For most Americans, until the recent past, home ownership was a dream and the pile of rent receipts was the reality. From 1900, when the census first started gathering data on home ownership, through 1940, fewer than half of all Americans owned their own homes. Home ownership rates actually fell in three of the first four decades of the 20th century. But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes (see chart above). Among whites, more than 75% are homeowners today. Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation. We are a nation of homeowners and home-speculators because of Uncle Sam.

Herbert Hoover signed the Federal Home Loan Bank Act in 1932, laying the groundwork for massive federal intervention in the housing market. In 1933, as one of the signature programs of his first 100 days, Franklin Roosevelt created the Home Owners' Loan Corporation to provide low interest loans to help out foreclosed home owners. In 1934, F.D.R. created the Federal Housing Administration, which set standards for home construction, instituted 25- and 30-year mortgages, and cut interest rates. And in 1938, his administration created the Federal National Mortgage Association (Fannie Mae) which created the secondary market in mortgages. In 1944, the federal government extended generous mortgage assistance to returning veterans, most of whom could not have otherwise afforded a house. Together, these innovations had epochal consequences.Easy credit, underwritten by federal housing programs, boosted the rates of home ownership quickly. By 1950, 55% of Americans had a place they could call their own. By 1970, the figure had risen to 63%. It was now cheaper to buy than to rent. It's a story riddled with irony—for at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army of banking, real-estate and construction lobbyists who rose to protect their industries' newfound gains. Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever. But by the 1960s and 1970s, those who had been excluded from the postwar housing boom demanded their own piece of the action—and slowly got it. The newly created Department of Housing and Urban Development expanded home ownership programs for excluded minorities; the 1976 Community Reinvestment Act forced banks to channel resources to underserved neighborhoods; and activists successfully pushed Fannie Mae to underwrite loans to home buyers once considered too risky for conventional loans. Minority home ownership rates crept upward—though they still remained far behind whites. Even at the peak of the most recent real-estate bubble, just under 50% of blacks and Latinos owned their own homes. It's unlikely that minority home ownership rates will rise again for a while. In the last boom year, 2006, almost 53% of blacks and more than 47% of Hispanics assumed subprime mortgages, compared to only 26% of whites. One in 10 black homeowners is likely to face foreclosure proceedings, compared to only one in 25 whites.During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

Bottom Line:More support for the high likelihood that the global financial crisis, mortgage tsunami, and housing bubble can all be traced to federal government intervention to create affordable housing, see previous CD post here.

14 Comments:

Over the decades millions of Americans were able to responsibly purchase their own home because of the government facilitation. Only recently, have we had a surge of foreclosures. These were not the result of government actions, but the greed and recklessness of banks and other lenders. If the government is at fault of anything, it is the failure to adequately regulate banks.

Almost the entire extended U.S. housing boom took place in upper and middle class neighborhoods, which expanded and new neighborhoods were created. Throughout the 2000s, U.S. actual output was generally below potential output. Without the U.S. housing boom, and related goods, actual output would have been even lower. The NeoKeynesians believe building pyramids benefits society when output is too low (and believe in the broken window fallacy). Obviously, houses are more useful.

"Too many" houses were the result of global imbalances, which were created by governments of export-led economies, and the steep rise in U.S. homeownership from 1995 took place in a relatively free market period.

We've had a housing crisis practically every decade since WWII. They were ALL caused by overbuilding and lax lending standards with incentives from government. Foreclosures are pushing to new record highs, but they reached old record highs during the previous crises.

Using Thomas Sowell's analogy, blaming the housing crisis on "greed" is like blaming an airplane crash on "gravity." Incentives to speculate, lie, steal, and cheat exist every day. That doesn't explain one bit why THIS happened NOW.

What were regulators supposed to do to regulate banks? Tell them they could not make profits? Tell them they couldn't lend using the "affordable mortgage" products created by government? Tell them they couldn't sell their loans to Fannie and Freddie? You're just parroting the "deregulation" mantra and haven't got the faintest idea what you're talking about.

Government needs to get out of the housing business. These housing cycles are causing our business cycles.

> the steep rise in U.S. homeownership from 1995 took place in a relatively free market period.

Yeah, the GSEs had nothing to with it.

Nor the aggressive "racist policy" attitude of the Clinton DoJ with regards to the CDA.

And it certainly had nothing to do with the threat of racial protests whenever a bank or lender actually discriminated against someone solely for financial reasons but there was a racial statistic also detectable (though not causative in any way) in the data.

The "American Dream" as expressed by James Truslow Adams is the idea that people, regardless of background or social class, can achieve a "better, richer, and happier life."

Adams does indeed mention material goods like "motor cars and high wages" but he sharpens the point to a social order wherein attaining those goods through one's own wit, wile and work are made possible.

Politicians have so confused and conflated the "American Dream" with a "house" that the two are indistinguishable today.

While home ownership brings a sense of pride, a house is seldom a good "investment" and the emotions attached to "house and home" often override the basic notion that it is merely property which can and should be disposed of when greater financial needs must be met. And the debt undertaken to achieve home ownership must be done with prudence, forethought, and acceptance of the consequences of failure.

um, how about enforce normal lending standards? stuff like . . . the borrower could repay the loan.

While this would seem reasonable to most people (including me), bank regulators DO NOT enforce lending standards in the way you think they can and should.

Bank examiners only have the time to look at a relatively small sample of loans from a bank's files. These loans are either "passing" or "classified" according to the likelihood of repayment. Nowhere in the process do bank examiners check the math of FICO scores or call employers to verify wages to double-check lending standards.

Loans are either performing or they are not. If banks are up to their eyeballs in risky loans but those loans are performing, this will have a minimal impact on their bank's Asset Quality rating. They'll be warned about the risk of their assets - that's it. If banks originate risky loans and then sell them (to other banks or GSEs) as long as they are off the balance sheet they are not part of a bank's rating.

Banks ALWAYS had an incentive to originate risky loans, but this was tempered by the risk of default. When GSEs started buying mortgages without regard to quality (under Bill Clinton), banks no longer had any incentive to take risk into consideration. They pocketed origination fee income and sold them to willing buyers: Fannie, Freddie, and Wall Street.

Before you launch into criticism of what bank regulators did not do, gain an understanding of what they CAN and CANNOT do.

Then understand that, ultimately, they answer to GOVERNMENT and when Congress and the President want higher home ownership, by God they're going to get it come Hell and high water!

I agree that Govt. intervention surely contributed to the housing crisis but don't forget that the banks leveraged the loans 20-30:1 under the mistaken belief that prices would always rise. When they collapsed, so did the banks' capital ratios and hence the need for the bailouts to prevent a total run on the banks. I suppose we could have said no, but then so did Mellon in '29-'30 and looked what happened then.

Housing subsidy had degenerated into a bonanza for a thousand fingers in the pie, the broker, the mortgage insurance, appraiser, the title searcher, and the list goes on. The client, the constituent, the customer was ignored. Although he was looking for modest but mostly healthy place to hang hat, he was detoured toward something that would drain him much too quickly. Now, he is renting, living on the street or in shelter as his subsidy money has been gobbled up by the turkeys.

Time to stop the subsidies? Except for your dream, within a dream, within a scheme, within a Ponzi.

Let us not forget a significant cause of this mess, FRAUD! Follow the trail on many a foreclosure and you'll uncover fraud; as in the borrower who purchased three homes within a 30-day period (two the same day), all owner occuppied and with 100% financing!

Why isn't this borrower in jail? The FBI does not have near the resources necessary to address the tens of thousands of SARs reports filed annually.

Think for a moment about the impact these bogus sales had on property values ....